FAIR VALUE MEASUREMENTS AND AUCTION RATE SECURITIES

As of December 31, 2011 and 2010, Acacia held investment grade auction rate securities with a par value totaling $2,425,000 and $2,485,000, respectively, consisting of auction rate investments backed by student loans, issued under programs such as the Federal Family Education Loan Program, which are classified as available-for-sale and reflected at fair value. Auction rate securities are classified as noncurrent for the periods presented. Contractual maturity dates range up to thirty-five years, with reset dates every 7 to 63 days.

Due to liquidity issues in the global credit and capital markets, these securities have experienced failed auctions since February 2008. In the case of a failure, the auction rate securities continue to pay interest at the maximum contractual rate in accordance with their terms; however, Acacia may not be able to access the par value of the invested funds until a future auction of these investments is successful, the security is called by the issuer, or a buyer is found outside of the auction process.

The fair values of these securities were estimated utilizing an analysis of certain unobservable inputs and by reference to a discounted cash flow analysis as of December 31, 2011 and 2010. These analyses considered, among other items, the underlying structure of each security, the collateral underlying the security investments, the creditworthiness of the counterparty, the present value of future principal and contractual interest payments discounted at rates considered to be reflective of current market conditions, consideration of the probabilities of default, continued auction failure, or repurchase or redemption at par for each period, and estimates of the time period over which liquidity related issues will be resolved. Observable market data for instruments with similar characteristics to Acacia’s auction rate securities was also considered when possible.

Acacia recorded an other-than-temporary loss of $296,000 in the statement of operations for the year ended December 31, 2009. As a result of partial redemptions at par on certain of these auction rate securities subsequent to June 30, 2008, Acacia recorded net realized gains totaling $15,000, $32,000 and $13,000 for the years ended December 31, 2011, 2010 and 2009, respectively, reflecting partial recoveries of the other-than-temporary losses originally recorded on these securities. As of December 31, 2011, the net other-than-temporary loss on auction rate securities collateralized by student loan portfolios totaled $469,000.

All of Acacia’s auction rate securities issued by closed-end investment companies were redeemed at par as of December 31, 2009, resulting in realized gains totaling $236,000 for the year ended December 31, 2009, reflecting the full recovery of the other-than-temporary loss originally recorded on these securities.

Acacia will continue to monitor and evaluate its investments in auction rate securities for any further potential impairment in future periods. If it is determined that any future valuation adjustments are other-than-temporary, Acacia would record additional charges to earnings as appropriate.

The following table presents the assets measured at fair value on a recurring basis using significant unobservable inputs (Level 3) at December 31, 2011 and 2010 (in thousands):



	2011			2010

Auction rate securities:
Beginning balance as of January 1	$	2,001		$	2,152
Total gains or (losses) (realized or unrealized):
Recognized (losses) included in earnings	—			—
Recognized gains included in earnings	15			49
Settlements	(60		)	(200		)
Ending balance as of December 31	$	1,956		$	2,001